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Director Derivative Liability – Finally a Policy Shift

26 March 2012

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Director Derivative Liability – Finally a Policy Shift

Company directors should be aware that there is only less than a week left to make a submission to Treasury in regards to the Federal Government’s first tranche of proposed amendments to directors’ liability legislation. Submissions are due on 30 March 2012.

Background

Most directors are probably all too familiar with the term “derivative liability” – it is the term given to define what has come to resemble an increasing number of pieces of legislation that impose criminal liability upon directors for the commission of an offence by the company.

After sustained criticism for many years, the Business Regulation and Competition Working Group of the Council of Australia Governments (COAG) resolved to commence a series of reforms limiting and sometimes removing derivative liability.

The principles behind the reform agenda, agreed by COAG, are that, where a corporation breaches a statutory obligation, the corporation as an entity rather than its directors, should be held responsible first, at least to a certain extent.

Rather than allowing legislation to connect corporate contravention with personal liability by default, COAG now believe personal criminal liability should be restricted to instances where:

there is a high risk of public harm that may be caused by the company committing the breach

the liability of the company alone will be unlikely to compel compliance and

the director should be liable considering that the director has capacity to influence the conduct of the company in relation to the offending and where there are steps

a reasonable director would ordinarily take to ensure the corporation’s compliance.

In these instances, COAG has agreed that a director should only be held criminally responsible if they encourage or assist in the commission of the offence, or are reckless or negligent in relation to the corporation’s conduct.

Of course, such principles are yet to be incorporated into much of the relevant legislation, but they are a positive step forward in the area of derivative liability which has often been critiqued for its stifling effect on corporate risk-taking, director diversity and innovation.

Proposed amendments

The exposure draft of the first tranche of changes outlines amendments to non-taxation related Commonwealth legislation (ie the Corporations Act 2001, the Foreign Acquisitions and Takeovers Act 1975, the Insurance Contracts Act 1984 and the Pooled Development Funds Act 1992).

Taking the Corporations Act as an example, the Federal Government proposes to amend Section 188 (which most Company Secretaries will be quite familiar with). A breach of section 188 results in a strict liability offence of the company secretary, and by each director if the company does not have a secretary. It is proposed that section 188 instead be deemed a civil penalty provision, removing criminal culpability.

However, the proposed exposure draft also increases the civil penalties for some contraventions, including those for breach of the provisions relating to registered office jurisdiction requirements, opening hours of registered offices of public companies, notifying ASIC of a change in the principal place of business, and a range of other provisions.